(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

HONG KONG  - There may be a crack forming in Hong Kong’s currency board, but it’s probably too narrow for Kyle Bass to slip through. The founder of Hayman Capital Management is betting that the currency’s greenback link will snap within 18 months, Bloomberg reports. The peg is vulnerable if Beijing’s new security law frightens investment away. But there’s little sign of that yet.

Trying to break Hong Kong’s currency out of its fixed 7.75-7.85 per U.S. dollar range has long been an undertaker trade. The Hong Kong Monetary Authority fended off an attack by George Soros, the man who successfully assaulted the British pound, in 1998; others have tried and failed since. Now Bass is betting the currency will crash out of the band and soften by as much as 40% in less than two years. With the city’s economy contracting, protests reviving, the United States mulling sanctions, and Beijing preparing to crack down on sedition, his timing, at least, is good.

Bass last year noted that between 1978 and 1984 the Hong Kong dollar devalued by 47% as investors fretted about the city’s handover back to Chinese rule. The peg was installed to restore confidence, but its sustainability still depends on demand for Hong Kong stocks, bonds, and property. Political panic could prompt emigration, a real estate crash, and an exodus of multinationals. Each would cause people to swap Hong Kong dollars for other currencies. With credit to the private non-financial sector at over 300% of the city’s GDP, capital flight would quickly make it hard to keep local currency interest rates in sync with U.S. dollar rates.

Nothing of the sort is underway now. Indeed the HKMA is now intervening to check a rally as the Chinese economy recovers. Rate spreads between the two currencies look manageable, and forwards markets have stabilised after startling in May. Stories of retail money fleeing to places like Singapore remain anecdotal so far. The HKMA’s foreign exchange reserves hold $442 billion, over six times currency in circulation, plenty to fend off speculators. The peg may break eventually, but probably not before it claims another victim.

 

CONTEXT NEWS

- The Hong Kong Monetary Authority sold HK$3.72 billion ($480 million) into the market on June 10 as the Hong Kong dollar strengthened to its trading limit. The Hong Kong dollar is pegged in a narrow range of 7.75-7.85 per U.S. dollar.

- Kyle Bass, founder of Dallas-based Hayman Capital Management, is starting a new fund that will make “all-or-nothing” trades betting that Hong Kong’s currency peg collapses, Bloomberg reported on June 9, citing sources. Bass declined to comment.

- Banks including HSBC, Standard Chartered and Citigroup have seen a spike in enquiries from Hong Kong residents about opening offshore accounts amid concerns stemming from China’s May decision to impose a national security law on the city, Reuters reported on June 8, citing unnamed sources.

- On June 7 the Monetary Authority of Singapore publicly denied media reports that it had received “large flows” of bank deposits from Hong Kong.

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

(Editing by Robyn Mak and Sharon Lam) ((pete.sweeney@thomsonreuters.com; Reuters Messaging: pete.sweeney.thomsonreuters.com@reuters.net))